Factory Overhead

Lecture-16
Main Ahmad Farhan (ACA)
 Exercise

Machining Finishing Maintenance Air-conditioning Allocated

indirect cost
100,000 70,000 40,000 30,000 240,000

Machining Finishing Air-conditioning

Maintenance 60% 15% 25%

Appropriation
Air Conditioning 70% 25% 5%
 Solution

Maintenance Dept (40,000)+5% of Air condition

Aircondining Cost(30,000)+25% of maintenance
X =40,000+5% of y
X = 30,000 + 25% of x
X =40,000+0.05(30,000+0.25x)
X =40,000+1500+0.0125x
X-0.0125x = 41,500
0.9875x = 41,500
X = 41,500
0.9875

Cost of Maintenance Dept x = 42,025

 Solution

y = 30,000 + 25% of x
y = 30,000 + 0.25 (42,025)
y = 30,000 +10,506 = 40,506
Y = 40,506
 Algebraic Method
Machinery Finishing Maintenance Air-condition
1,00,000 70,000 40,000 30,000
(42,025)

25,215 6,304 2,025 10,506

(40,506)
28,354 10,127 2,025 40,506
1,53,569 86,431 0 0

Machining Finishing Air-conditioning

Maintenance 60% 15% 25%

Appropriation
Air Conditioning 70% 25% 5%
 Solution

Production Service
Allocate Machining Finishing Maintenance Air-conditioning
Indirect cost
(240,000) 100,000 70,000 40,000 30,000
Maintenance 24,000 6,000 (40,000) 10,000
Air conditioning 28,000 10,000 2,000 (40,000)
Maintenance 1,200 300 (2000) 500
Air conditioning 350 125 25 (500)
Maintenance 15 3.50 (25) 6.50
Air conditioning 5 1.50 0.50 (6.50)
153,570 86,430
Applied Rate

Estimated FOH Cost

Estimated activity level
 Basis Of Overhead Absorption

 Machine hours Per Hour

 Direct Labor hours
 Prime Cost
Percentage
 Direct Labor cost
 Number of unit out put Per unit
 F.O.H Variance

Reasons of Variance
1. Difference between capacity level over which overhead
absorption rate is calculated & capacity level attained.
2. Difference between FOH cost budget or estimated over
which overhead absorption rate and FOH actually
incurred.
F.O.H Variance

Budget Variance/Spending variance

Arises due to 2nd reason.

Capacity Variance / Volume Variance

Arises due to 1st reason.
 Formula of Variance

Volume Variance
Applied F.O.H cost ***
Less Estimated F.O.H cost ***
***
If + favorable
If - unfavorable

Budgeted Variance
Estimated F.O.H cost ***
Less Applied F.O.H cost ***
***

If + favorable
If - unfavorable
 Example
Estimated Cost
Fixed FOH cost Rs. 80,000
Variable FOH cost 1,00,000
Activity Level 20,000 Direct Labor hours
Actual Cost
Fixed FOH cost 80,000
Variable FOH cost 1,20,000
Activity Level 25,000 Direct Labor hours
Rates
Variable FOH rate = 80,000/20,000 = 4/Direct labor hrs
Fixed FOH rate =100,000/20,000 = 5/Direct labor hr
Overhead absorption rate 9
 Solution
Volume Variance
Applied FOH cost (capacity attained x Overhead absorption rate)
25,000 x 9
2,25,000

Estimated FOH cost {Fixed FOH cost+(capacity attainedxvariable rate)}

80,000 + (25,000 x5)
2,05,000
Favorable 20,000
 Solution
Budgeted Variance

Estimated FOH cost 2,05,000

Less Actual FOH Cost 2,00,000
Favorable 5,000

Total Variance

Applied FOH 2,25,000

Less Actual FOH 2,00,000 OR Volume Variance (Fav) 20,000
Add Budgeted Variance (Fav) 5,000
Total Variance 25,000
25,000
Alternative method

Volume variance
Estimated FOH cost (25,000 x 4) 1,00,000
Actual fixed 80,000
20,000
Budgeted variance
Estimated FOH (5,000x5) 1,25,000
Less Actual FOH 1,20,000
5,000